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Why This Energy Stock's Third Quarter Caught Us Seriously Off Guard

Hint: It's a company that booked more solar installations than the next 70 competitors combined.

SolarCity(NASDAQ:SCTY.DL) stock took a hit after the company reported a third quarter that didn't meet some of the market's loftier expectations. Yet there's a lot to like about SolarCity, and plenty of reasons to remain bullish on the company, even if it's not growing at the rocket-engine rates some have come to expect.

A full transcript follows the video.

Sean O'Reilly: We've already talked about a few companies that surprised you guys on the upside. Flirted a bit with Shell. Any other companies that disappointed you and made you rethink your previous bullishness?

Taylor Muckerman: This one didn't disappoint me to the fact that I'm rethinking my bullishness, but I was kind of caught off guard in the negative aspect of SolarCity.

O'Reilly: How did I know you were going to go there?

Muckerman: Down big. I think Friday...

O'Reilly: 20%, right?

Muckerman: Yeah. Not because it had anything terrible to say; they're just changing the strategy a bit. They're actually going to be profitable rather than growing like wildfire. They just had so much growth priced in, and I think the fact that people probably saw that they're trimming their growth forecast and then forgot about the fact that they're planning on being cash flow positive for the first time.

I think that's a benefit long term. Unfortunately, this company has been a giggity-growth stock since its inception.

Muckerman: Fools love free cash flow. That's what we want. Long term, I'm still very bullish on this company.

O'Reilly: You are? OK.

Muckerman: I saw where they said they've installed more solar installations than the next 70 competitors combined. They're doing something right. They're going to continue to grow. They're not abandoning growth. They've stated they're preparing for the reduction in the investment tax credit at the end of this coming year.

O'Reilly: I'm kind of surprised that's going away.

Muckerman: It's going from 30% to 10%. It's still not nearly as meaningful...

O'Reilly: That's a 66% hit.

Muckerman: Yeah, because it's only a 10% tax credit. They said that sales is getting more costly because of competition, so they're going to focus on reducing the cost of making a sale, and focus on lower-cost sales, and also focusing on the commercial market, which they're only about 8% of right now. They're expanding into new markets; they're just not focusing on residential growth as heavily.

Tyler Crowe: Like you said, one of the things that was a big "red flag" for investors, or Wall Street, or whomever...

O'Reilly: Day traders.

Crowe: Whoever you want to say it reacted so negatively to the release was the fact that, if you look at their cost per watt development -- sales, general administrative costs -- over that quarter had grown substantially to the point where it was starting to hamper profitability.

If you look at the cost per system, the amount that it takes for installation, the procurement of the solar panel system -- that has gone down rather impressively, and has actually beaten their goals so far. However, the fact that their sales had gotten so high...

Muckerman: They were doing a lot of hiring.

Crowe: Yeah. The cost to acquire was getting to the point where it didn't make as much sense to grow at gangbusters. To be fair, one of the things when you look at their growth targets previously -- I believe it was somewhere in the high 60s per year...

O'Reilly: And this is just investor presentations, they broadcast it, and -- yeah.

Crowe: Yeah. Their compounded annual growth rate they were anticipating was in the 60s. What they had been doing previously was 100%.

Muckerman: Yeah. They'd been doubling over the last five years.

O'Reilly: But we're still talking about tripling your size every two to three...